Loan Growth Stagnating Despite Lower Cost Capital

Since the National Bureau of Economic Research determined that the last U.S. recession ended in June 2009, bank loan growth in the U.S. has been anemic. Growth averaged about 1.25% annually for a total loan growth of 4%, taking total loans outstanding at U.S. banks up from about $7.3 trillion to about $7.6 trillion.

Given the fact that this coincided with the greatest monetary intervention and lowest engineered cost of capital to banks and borrowers in U.S. history this level of growth is alarming. This issue is even more disturbing though when the performance of different types of loans is examined.

The value of first trust residential loans at U.S. banks in the fourth quarter of 2009 was about $1.74 trillion. Today it is only about $1.79 trillion. Even after residential real estate values declined by about a third and mortgage rates declined to their lowest in history, banks have only grown their mortgage assets by 3% in total in three years!

A home purchased in 2007 for $500,000 with a $100,000 down-payment of 20%, and financed with a mortgage of $400,000 at a 30-year fixed rate of 6.5%, carried a monthly principal and interest payment of $2,515.

That same house today, on average, can be purchased for $375,000. With a $75,000 down payment of 20%, a mortgage of $300,000, financed at 3.5% and carrying a monthly principal and interest payment of $1,343.

Since the housing bubble popped, the debt carry cost of newly financed or refinanced residential real estate declined by almost 50%, and yet, the housing market languishes.

The increase in housing activity this year, championed as an indication of secular growth again, and the stock prices of home building companies increased an average 50% to 100% this year.

Construction and development loans being made by banks to these same builders though declined by 12.5% over the same period. This trend continued every quarter since the recession ended three years ago. During that time these loans declined by more than 50%, from $450 billion to $210 billion.

Consistently over the past three years as well, home equity loans declined every quarter by a total of 15% today, second trusts declined by 43%, and personal loans declined by 50%.

The only two loan categories experiencing an increase over the past three years are credit card balances and auto loans. Credit card balances carried by banks increased about 60% and continue to increase. The default rate decreased by an even greater percentage. Auto loans increased by about 20% in the past few years.

Over the past 3 years on the commercial loan side, the value of commercial real estate loan balances and lease financing decreased by 3% and 5% respectively. Multifamily loans and farm loans increased by 7%. The only marked increases have been in commercial and industrial loans which increased about 20%.

These are all cumulative figures and indicate that banks are not lending and borrowers are not borrowing. In order for the economy to grow and the residual losses caused by the housing and financial crisis to be absorbed by banks and individuals, this must change.

It is unhealthy and unviable for an economy with a banking system relying almost exclusively on credit cards, farm loans and commercial and industrial loans for growth in debt capital to increase economic activity and supply jobs.

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